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MGT 634 Purchasing and Supply Management

Dr Atul Kanyalkar

The Course Objective


To
provide an overview of the Purchasing and Supply Management (PSM) Function understand the processes, procedures and policies followed in PSM provide a brief understanding about PSM functionalities in

ERP systems
provide the information about the tools and trends in PSM.

MGT634 Purchasing and Supply Management

At the end of this course


You will be able to

Appreciate the significance of PSM function in


an organization

Appreciate relevance of various processes


followed in PSM function

Understand relevance of ERP in PSM.


MGT634 Purchasing and Supply Management

Procurement-Production-Distribution System
Supplier 1
Selling Location 1

Port Supplier 2

Manufacturing Plant

Selling Location 2

Supplier 3
Selling Location 3

Inbound logistic or Procurement

Production

Outbound logistic or Distribution

MGT634 Purchasing and Supply Management

Supply Chain
Selling Location 1

Port 1

Own Manufacturing Plant 1 TP Manufacturing Plant 2 LL Manufacturing Plant 3 HUB

Selling Location 2 Selling Location 3

Supplier 1

Supplier 2

Stockiest Retailer
Selling Location 4 Selling Location 5 Selling Location 6

Port 2

Procurement

Production

Distribution

The syllabus
1. 2. 3. 4. 5. 6. 7. 8. 9. PSM Concepts Staging Policies and PSM Purchasing Process Make or buy decisions Purchase Negotiations Ethics in Purchasing Legal Aspect in Purchasing EDI and e-sourcing Vendor development and evaluation
MGT634 Purchasing and Supply Management

The syllabus
10. Vendor Managed Inventory 11. Vendor Performance Measurement 12. Capital Equipment Purchasing 13. Service Sourcing 14. Multi-Location Procurement Problem 15. Purchasing Functionality in ERP 16. Business Planning 17. Supplier Certification
MGT634 Purchasing and Supply Management

The syllabus
18. Material Storage and Warehouse Activities 19. Warehouse Utilization 20. Safety and Security Aspect 21. Obsolescence 22. Disposal of scrap 23. Material Handling 24. ERP in Warehouse 25. New Product Development
MGT634 Purchasing and Supply Management

References
1. 2. Dobler D. W. and Burt D. N., Purchasing and supply management, Tata McGraw-Hill Publishing company, 1996. Monczka R., Trent R. and Handfield R., Purchasing: An integrated supply chain approach, South-western Cengage Learning. 2005. Coyle J.J., Bardi E.J. and Langley(Jr.) C.J., The management of business logistics, 7th ed., South-western Cengage Learning, 2003. Tony Arnold J.R. and Chapman S.N., Introduction to Materials Management, 5th ed., Pearson Education, 2004. Cases and papers provided time to time
MGT634 Purchasing and Supply Management

3.

4. 5.

Class Discipline
Attendance

Class timings (attendance will be taken at the beginning) Audit Attendance and minimum passing criterion Academic Dishonesty
MGT634 Purchasing and Supply Management

Course Evaluation
1. Assignments (30%)
Case Analysis / Paper Reviews (Group & Individual) : [30%]

Tests
2. End-term Test:

(70%)
[20%] * [50%] *

1. Mid-term test & class tests:

* Closed Book
MGT634 Purchasing and Supply Management

Teaching Sequence
Mon 3 10 17 24 1 8 15 22 29 Tue 4 11 18 25 2 9 16 23 30 Wed 5 12 19 26 3 10 17 24 31 Thu 6 13 20 27 4 11 18 25 1 Fri 7 14 21 28 5 12 19 26 2 Sat 1 8 15 22 29 6 13 20 27 3 Sun 2 9 16 23 30 7 14 21 28 4

Sep

Oct

MGT634 Purchasing and Supply Management

Introduction to Purchasing and Supply Management

Purchasing Supply Management : Terms


2nd Tier Supplier 1st Tier Supplier Purchasing
Manufact. & Distribution

Marketing

Customer

Value Chain Management

Supply Chain Management

Demand Chain Management Business Logistics

Logistics Management Purchasing and Supply Management Physical Distribution

MGT634 Purchasing and Supply Management

Purchasing and Supply Management : Definitions


Supply Management
It is the process responsible for the development and management of a firms total supply system for both internal and external components.

Purchasing
The purchasing function comprises of the essential activities associated with the acquisition of the materials, services, and equipments used in the operation of an organization.

MGT634 Purchasing and Supply Management

Objectives
Support Production Reduce Cost Of Materials Ensure Consistent Quality Reduce Inventory Investment Improve Corporate Image Supplier Relations Maintenance of Records Preserve and Conserve Materials in Stock Improve Competitive Strength
MGT634 Purchasing and Supply Management

Purchasing and Supply Management Activities


Materials Planning and Scheduling Make or Buy Procurement (materials, equipments, tools, supplies and services) Transportation Warehousing Salvage and Scrap Disposal

MGT634 Purchasing and Supply Management

Importance
Purchasing and Supply Management can have a major impact on organization success by influencing:

Cost Quality Sales Profits Product development time

Technologies and innovation Customer service Competitive advantage

MGT634 Purchasing and Supply Management

Why Purchasing is Important


Industry Materials/Sales Revenue
76% 70% 61% 59% 59% 50% 49% 44% Petroleum Automobile Wood Products Textile Mills Food Manufacturing Machinery Electrical Equipment Computers and electronics

MGT634 Purchasing and Supply Management

Why Purchasing is Important


Purchasing as a profit producer
Profit =

Revenues

Cost

Impact of Purchasing on Revenues

Impact of Purchasing on costs

Profit

= Revenues -

Cost

MGT634 Purchasing and Supply Management

Why Purchasing is Important


Profit-Leverage Effect
Assuming an 8% margin
Profit (Rs 100,000)

= Revenues -

Cost
-

(Rs 100,000)

Profit (Rs 100,000)

= Revenues

(Rs.1,250,000)

Cost

THEREFORE, in this example, the Profit-Leverage Effect is . . . 1,250 ,000 1

100 ,000

12 .5

0.08

MGT634 Purchasing and Supply Management

Costs Involved
Basic Cost Of Materials Government Levies And Taxes Ordering Cost Inventory Carrying Cost Packaging And Packing Cost. Material Handling Cost Freight Cost Insurance Cost Wastage During Receipt , Storage etc.
MGT634 Purchasing and Supply Management

Interdepartmental Relations
Production Sales And Marketing Finance Research And Development Engineering Quality Control Planning Legal Security
MGT634 Purchasing and Supply Management

Purchasing and Supply Management


Procurement
Material Source Price Quality Quantity Time Place
MGT634 Purchasing and Supply Management

Purchasing and Supply Management


Storage
Receive Store Track

MGT634 Purchasing and Supply Management

Purchasing and Supply Management


Usage / Issue
Material Sequence Price Quality Quantity Time Place
MGT634 Purchasing and Supply Management

Purchasing and Supply Management


Procurement

Storage

Usage
MGT634 Purchasing and Supply Management

Recap
Introduction
Defn Objectives Activities Importance Costs

Procurement / Storage / Usage

MGT634 Purchasing and Supply Management

Classification Of Materials
Large number of materials.
Planning, Procurement, storage, accounting of so many materials is a Problem.

Common procedures for Planning, Control, storage, issue, accounting for all materials
MGT634 Purchasing and Supply Management

Basis Of Classification
Stage of conversion Process
Direct (Raw materials / WIP etc) Indirect

Nature of Material
Finished goods Semi-finished goods

etc.

MGT634 Purchasing and Supply Management

Staging Policies
Staging Policies
Engineer to Order Design Purchase Manufacture Assemble Ship

Make to Order

Purchase Inventory

Manufacture

Assemble

Ship

Assemble to Order

Purchase Inventory Manufacture

Inventory

Assemble

Ship

Make to Stock

Purchase Inventory

Manufacture

Assemble Inventory

Ship

Engineer to order Make to order Assemble to order

No stock at all. The purchase and order of materials takes place based on the specific customer order. E.g. construction companies and shipyards. Only raw materials and components are kept in stock. Every customer is a specific project. E.g. beer and lemonade cans, basic construction materials Only systems elements, modules or subassemblies are in stock at the manufacturing center, whereas final assembly takes place based on a specific customer order. E.g. cars, computers. Finished products are kept in stock at the end of the production process and are from there shipped to geographically dispersed customers. E.g. dairy products.
MGT634 Purchasing and Supply Management

Make to stock

Staging Policies
Staging Policies
Engineer to Order Design Purchase Manufacture Assemble Ship

Make to Order

Purchase Inventory

Manufacture

Assemble

Ship

Assemble to Order

Purchase Inventory Manufacture

Inventory

Assemble

Ship

Make to Stock

Purchase Inventory

Manufacture

Assemble Inventory

Ship

Engineer to order Make to order Assemble to order Make to stock

Procurement (?), Storage (?), Issue (?) Procurement (?), Storage (?), Issue (?) Procurement (?), Storage (?), Issue (?) Procurement (?), Storage (?), Issue (?)

MGT634 Purchasing and Supply Management

Procurement Process

1. Need 2. Make or Buy Make

Major elements of the purchasing system


3. Purchase requisitions Article file 4. Supplier selection 5. Quotation 6. Order processing 7. Order monitoring and expediting 10. Supplier evaluation 9. Invoice processing Supplier file Contract file

11. Non-acceptance: return to supplier

8. Incoming inspection and quality control


MGT634 Purchasing and Supply Management

Staging Policies
Staging Policies
Engineer to Order Design Purchase Manufacture Assemble Ship

Make to Order

Purchase Inventory

Manufacture

Assemble

Ship

Assemble to Order

Purchase Inventory Manufacture

Inventory

Assemble

Ship

Make to Stock

Purchase Inventory

Manufacture

Assemble Inventory

Ship

ETO (for each materials)


Requirement Generation Receiving and analysing PR Supplier selection Right price PO Follow up Receiving and accepting Invoice approval and payment
MGT634 Purchasing and Supply Management

Staging Policies
Staging Policies
Engineer to Order Design Purchase Manufacture Assemble Ship

Make to Order

Purchase Inventory

Manufacture

Assemble

Ship

Assemble to Order

Purchase Inventory Manufacture

Inventory

Assemble

Ship

Make to Stock

Purchase Inventory

Manufacture

Assemble Inventory

Ship

MTS (for most materials) Supplier selection Right price


Requirement Generation Receiving and analysing PR PO Follow up Receiving and accepting Invoice approval and payment
MGT634 Purchasing and Supply Management

1. Need

Reorder point (Office


stationary)

Need

Lot size Lead time MPS / MRP (ETO, ATO, MTS) Lot Size Lead time Dependent Independent Optimization (ETO, ATO, MTS) Lot Size Lead time Dependent Independent
MGT634 Purchasing and Supply Management

Project Plan (ETO) Technical & Unique requirements Well defined timelines

Need

Capacity Plans (Machines) Technical & Unique requirements Well defined timelines Strategic Plans (Services) Long term decisions Timelines can be uncertain Plan and mitigation plan

2. Make or Buy Decisions

Make or Buy
Strategic decision.

Precisely what business do we really want to be in, to maximize


the use of our core competencies

as we proceed into future.


MGT634 Purchasing and Supply Management

Make or Buy
Economics: It is not always economical for the companies to make all the materials used in its manufacturing process. Abilities / Technical skills Capacities Quality Design protection Assured supply
MGT634 Purchasing and Supply Management

Make / Buy ? ?
Making
Lower production cost Unreliable or unsuitable suppliers Assure adequate supply (Quantity) Utilize surplus labor capacity Obtain desired quality Protect special design or quality Expected benefit in long term

Buying
Lower acquisition cost Inadequate capacity Reduce inventory costs Ensure alternative sources of supply Item is protected by a patent or trade license

MGT634 Purchasing and Supply Management

Make or Buy
Choosing between making or buying an item is largely dependent on the Vertical Integration strategy of a company. Vertical integration - developing the ability to produce goods or services that are previously purchased It can take the form of forward or backward integration.

MGT634 Purchasing and Supply Management

Forward / Backward Integration

MGT634 Purchasing and Supply Management

Planned Order

Planned Order
Opening Period ??
Lead Time ??

Purchase Order
Specific Information

Purchase Requisition

Planned Order
General information

Planned order is used for visibility


MGT634 Purchasing and Supply Management

3. Purchase Requisitions

Purchase Requisition
XXX Department Purchase Department Supplier

Production

Warehouse

Formal communication to Purchase department to initiate procurement activities and procure the material mentioned in the requisition.
MGT634 Purchasing and Supply Management

Purchase Requisition
The PR Should contain following information
Originator Material Specification

Quantity and Unit of measure


Delivery date and place Any other information Signed (approved) Account to be charged
MGT634 Purchasing and Supply Management

4. Supplier Selection

Strategic Sourcing Plan


Discovery Evaluation

Selection
Development Management
MGT634 Purchasing and Supply Management

Strategic Sourcing Plan


Engineer to Order Make to Order Assemble to Order Make to Stock
MGT634 Purchasing and Supply Management

Discovery
1. Supplies catalogue
2. Print media :Trade directories, trade journals, news papers, yellow pages 3. Salespersons 4. Trade exhibition, fairs, conferences 5. Colleagues in similar field 6. Internet ..
MGT634 Purchasing and Supply Management

Evaluation
Background Informed
Surveys Financial checks Facility visits Quality Capacity Management / Systems IT Systems -------MGT634 Purchasing and Supply Management

Supplier Selection
Check the following Whether the items were purchased earlier ? (Straight rebuy) Any change since then ? (Modified rebuy / new buy) Are the items similar / related to any other item purchased ? Can we replace the item by any other item which we are currently purchasing ? Are the items standard ?
MGT634 Purchasing and Supply Management

Supplier Selection
Bidding
Value of Purchase Clear specifications Number of sellers available Vendors interested in order Time

Negotiation
Situations when cost estimates are difficult Price is only the only important factor Supplier may have better knowledge then the buyer

Bidding and then negotiation


MGT634 Purchasing and Supply Management

Overview of Vendor Selection Criteria

MGT634 Purchasing and Supply Management

Prioritization Matrix
Weight Quality Reliability Capability Financial Score Weighted Score

Others

Final result
MGT634 Purchasing and Supply Management

Supplier Development
????????

-Alignment of systems -Alignment of expectations -Knowledge transfers -------MGT634 Purchasing and Supply Management

Managing Suppliers
Feedbacks Situation recheck Corrective actions Realignment

MGT634 Purchasing and Supply Management

Supplier Selection Issues


Size Relationship Usage of International Suppliers Competitors as Suppliers Countertrade Requirements Social Objective

MGT634 Purchasing and Supply Management

Pricing

Sources of Price Information


Commodity Markets Exists for basic materials (grain, oil, sugar etc.) Demand and supply Long term prices Price Lists For standard products Vendors catalog Quantity discounts available Price Quotations For both Standard and specialty items Useful for promoting competition RFQ (Should contain the manner in which supplier should submit offers)
Specifications Quantity Period

Price

Negotiations For long term relationships or for high cost items Time consuming Process Can lead to significant quality and price benefits
MGT634 Purchasing and Supply Management

Total Cost of Ownership


Acquisition Costs Price Planning costs Duties .. Ownership costs Downtime costs Risk Cycle time . Post Ownership Costs Warranty costs Product Liability .. Remember: As a purchasing Manager you should also focus MGT634 Purchasing on suppliers manufacturing cost and Supply Management

Paper Mill Case


Purchased Fabric Belt 12 FT X 60 FT (Circumference) 25000 USD Lasts for 40 days Belts break on the machine Replacement takes 8 Hrs (16 man hours @ 45 USD per hour) Per day downtime cost of the plant 100,000 USD 4 6 belts are kept in inventory Industry average life of a belt is 60 days Benchmark belt life span 470 days @ 500,000 USD There are 20 plants across the world

MGT634 Purchasing and Supply Management

Negotiations and e-Sourcing/Auctions


Negotiations

Purchase requisitions

Supplier Selection

RFQ / Quotations

E-Sourcing /Auctions

Negotiations / Discussion

MGT634 Purchasing and Supply Management

Learning Curve

Learning curve
Improvement in output due to learning The learning rate represents productivity improvement as production doubles. Improvement in
Labour work style Process modification Product modification

Applicable when
New product / process Complex product Labour intensive
MGT634 Purchasing and Supply Management

Learning curve
Cumulative Units (N) 1 2 4 8 Total Labour Hrs (A) 20 34 58 100 Avg Labour Hrs per unit (B) 20 17 14.5 12.5 Learning Rate (%) (C) = (Bn-1-Bn)/Bn-1 15.0 14.7 14.8

16 32
64

168 288
493

10.5 9.0
7.7

16.0 14.3
14.4

MGT634 Purchasing and Supply Management

Quantity Discounts
Discounts on purchase of higher quantities Tradeoff between
Discounts Inventory carrying costs Storage costs Obsolescence costs

The order uncertainty getting transferred to the buyer.


MGT634 Purchasing and Supply Management

Quantity Discount
1 Unit @ $ 85 3 Units @ $ 80 6 Units @ $ 70 10 Units @ $ 69

Find Incremental price and units for the order Incremental price per units
MGT634 Purchasing and Supply Management

Quantity Discount
1 5 Unit @ $ 10 Each 6 10 Units @ $ 8 Each 11- 20 Units @ $ 7.8 Each 21- 100 Units @ $ 7.6 Each

Find Incremental price (for max order) and units for the order. Incremental price per units.
MGT634 Purchasing and Supply Management

Negotiations

What Is Negotiation?
A process of formal communication, either face-to-face or via electronic means, where two or more people come together to seek mutual agreement about an issue

or issues.
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management

What Is Negotiation?
Involves the

management of time,
information,

and power
between individuals and organizations who are

interdependent
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

MGT634 Purchasing and Supply Management

When Negotiation Required?


Is bid process inadequate? Are many non-price issues involved? Is contract large? Are technical requirements complex? Does contract involve plant, equipment or/and customization? Does contract involve a partnership? Will supplier perform value-adding activities? Will there be high risk or uncertainty?
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management

Non-price Negotiation
Quality Specification compliance Support Technical assistance Product research, development, and/or design Warranty Spare parts Training Tooling Packaging Data sharing, including technical data Transportation FOB terms

Performance compliance
Test criteria Rejection procedures Liability

Reliability
Design changes Supply Lead times Delivery schedule Consignment stocks Expansion options Supplier inventories Cancellation options

Carrier
Commodity classification Freight allowance/equalization Multiple delivery points

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin MGT634 Purchasing and Supply Management

Negotiation Strategy : Basic Steps


1. Develop the specific objectives (outcomes) desired from the negotiation

2.
3. 4. 5. 6. 7. 8. 9.

Gather pertinent data


Determine the facts of the situation Determine the issues Analyze the positions of strength for both (or all) parties Set the buyers position on each issue, and estimate the sellers position on each issue based on your research Plan the negotiation strategy Brief all persons on the negotiation team Conduct a dress rehearsal (Devils Advocate)

10. Conduct the actual negotiations with an impersonal calmness 11. Record the process and outcome
* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin MGT634 Purchasing and Supply Management

Negotiation planning and execution

MGT634 Purchasing and Supply Management

Game plan for Negotiation

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin MGT634 Purchasing and Supply Management

The Zone of Negotiation


Seller's Range $220,000 $230,000 $240,000 $250,000 $260,000 $270,000 $280,000 $290,000 $300,000 Buyer's Range

The overlap between what the Buyer will pay and what the Seller will accept defines the

Zone of Negotiation

MGT634 Purchasing and Supply Management

The Zone of Negotiation


$220,000 $230,000 $240,000 Buyer's Range $250,000 $260,000 $270,000 Seller's Range $280,000 $290,000 $300,000

There is a gap between what the Buyer will pay and what the Seller will accept. There is NO DEAL without Creativity or Compromise

MGT634 Purchasing and Supply Management

Sources of Negotiating Power


Informational power Access to information to be used for
persuasion using facts, data etc. (Only un/favorable is presented)

Reward power One party can offer something of value expecting


something in return. Give / Take.

Coercive power One party can withdraw something of value. Legitimate power Position of the person Expert power Special form of informational power Referent power Personal qualities and attributes of individuals
MGT634 Purchasing and Supply Management

*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

Being an Effective Negotiator


Willing to compromise or revise goals View issues independently Establish upper and lower ranges for each major issue Explore additional options Build on common ground between parties Avoid making irritating comments Avoid argumentation by presenting too many reasons (quickly) Make fewer counterproposals
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management

Overcoming Tactics
Modify tactics when they dont work Prepare for likely tactics to be used against you Tactics are more effective on you if you are unprepared, stressed, under severe deadlines, inexperienced, fatigued, or disinterested Try not to react without thinking
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

MGT634 Purchasing and Supply Management

Influencing factors in Negotiations


Low ball / High ball Honesty / Openness Questions Breaks Trial Balloon Price increase Best and final offer Silence Planned concessions Venue

*Purchasing & Supply Chain Management, Monczka, Trent, Handfield


MGT634 Purchasing and Supply Management

Win-Win Negotiation
Win-lose competitive or distributive bargaining Win-win collaboration or integrative bargaining
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

MGT634 Purchasing and Supply Management

Win-Win Methods
Expand the pie Ways to expand resources or value obtained Logroll Tradeoff of disagreeing issues Cost Cut Join hands in cutting costs and sharing benefits Bridge Involves inventing new options to satisfy both parties Non specific compensation One party achieves objective
other gets something of value as reward

*Purchasing & Supply Chain Management, Monczka, Trent, Handfield


MGT634 Purchasing and Supply Management

Ethical Issues

Ethics
The set of moral principles or values guiding our behavior In business, ethical behavior is the use of recognized social principles involving justice and fairness
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

MGT634 Purchasing and Supply Management

Rules of Ethical Behavior


Buyers must commit their attention and energies for the employers benefit rather than their own Buyers must act ethically towards suppliers and potential suppliers Buyers must uphold the ethical standards set forth by the profession
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management

Pressures Toward Unethical Behavior


Purchasing has control over large sums of money. Incentives linked to cost reduction. Suppliers may have great pressure to meet aggressive sales goals, leading to questionable sales practices
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management

Risks of Unethical Behavior


The act may also be illegal At a minimum, the buyer may lose his/her job
Personal bankruptcy Jail

There is a risk to a buyers professional reputation Risk to the buying companys reputation
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
MGT634 Purchasing and Supply Management

Types of Unethical Behavior


Reciprocity Preferential treatment to suppliers who are also customers to the organization. Personal buying Purchasing for personal needs of the employees. Accepting supplier favors Gifts and favors. Sharp practices Misrepresentation just short of fraud. Financial conflicts of interest investment in other companies.
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield

MGT634 Purchasing and Supply Management

Reciprocity
Giving preferential treatment to suppliers who are also customers Restrain competition Must rely on legitimate performance criteria to evaluate supplier capability

MGT634 Purchasing and Supply Management

Personal Buying
Purchasing department purchases materials or goods for the personal needs of its employees Subject to trade diversion laws Some exceptions do exist Often a gray area as to what to do

MGT634 Purchasing and Supply Management

Accepting Supplier Favors


Accepting gifts May effect a buyers judgment At what point does the gift represent showing appreciation vs. and attempt to influence future buying behavior Gifts from potential suppliers are particularly questionable

MGT634 Purchasing and Supply Management

Sharp Practices
Willful use of misinformation Exaggerating problems Requesting bids from unqualified suppliers solely to drive down prices from qualified suppliers Gaining information unfairly through deception

MGT634 Purchasing and Supply Management

Sharp Practices
Sharing information on competitive quotations Not compensating suppliers for design or other work Taking unfair advantage of a suppliers financial situation Lying or misleading

MGT634 Purchasing and Supply Management

Financial Conflicts of Interest


Direct financial interest in a supplier company Buying companies typically require disclosure by buyers having significant personal financial interest Similar to insider knowledge in buying and selling stocks

MGT634 Purchasing and Supply Management

Behaviors
Maintain highest standard. No gifts / favors Slow but steady

Remember: These are digital decisions in terms of actions and occurrences


MGT634 Purchasing and Supply Management

Cases
Gift delivered at home ? Equipment purchased higher then the normal price ? Unwanted equipment purchased ?

MGT634 Purchasing and Supply Management

Cases
You joined a new company and found that some of the employees are suppliers. Find other employees accepting / demanding gifts from suppliers

MGT634 Purchasing and Supply Management

Legal Aspects

Contract Terms
Ex-works: In an ex-works contract, the purchaser accepts full responsibility for arranging transportation from the suppliers location. For Purchaser this involves:
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea) Have them loaded on to the mode of transport Transported to, and unloaded at the destination port Cleared through customs and transported to the purchasers location.
MGT634 Purchasing and Supply Management

Contract Terms
Free alongside (FAS): In this arrangement, the supplier agrees to deliver to the (source) port specified by the purchaser For Supplier this involves
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea)

For Purchaser this involves


Have them loaded on to the mode of transport Insured, transported to, and unloaded at the destination port Cleared through customs and transported to the purchasers location.
MGT634 Purchasing and Supply Management

Contract Terms
Free on board (FOB): Here the supplier pays for and arranges loading on to the outward-bound transportation and thereafter the purchaser becomes responsible. For Supplier this involves
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea) Have them loaded on to the mode of transport

For Purchaser this involves


Insured, transported to, and unloaded at the destination port Cleared through customs and transported to the purchasers location.
MGT634 Purchasing and Supply Management

Contract Terms
Cost and Freight (C&F): This is a split responsibility arrangement in that the supplier arranges and pays for transportation to an agreed point, For Supplier this involves
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea) Have them loaded on to the mode of transport Transported to, and unloaded at the destination port

For Purchaser this involves


Pay insurance from when the goods are loaded on board. Cleared through customs and transported to the purchasers location.
MGT634 Purchasing and Supply Management

Contract Terms
Cost, Insurance, and freight (CIF): This is similar to C&F But here the insurance during transportation is responsibility of the supplier. For Supplier this involves
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea) Have them loaded on to the mode of transport Insured, transported to, and unloaded at the destination port

For Purchaser this involves


Cleared through customs and transported to the purchasers location.
MGT634 Purchasing and Supply Management

Contract Terms
Delivered: This is the opposite of ex-works in that the supplier has total responsibility for the goods, their transportation, insurance, and all documentation until they are delivered to the purchaser. For Supplier this involves
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea) Have them loaded on to the mode of transport Insured, transported to, and unloaded at the destination port Cleared through customs and transported to the purchasers location.
MGT634 Purchasing and Supply Management

Contract Terms

MGT634 Purchasing and Supply Management

Contract Terms
Supplier Transport Ex Works Insurance Supplier Purchaser Supplier Purchaser Port Ship Transit Ship Port Purchaser Transport Free Alongside Insurance

Supplier
Purchaser Supplier Purchaser

Transport Free On Board Insurance

Supplier Purchaser

Supplier
Purchaser

Transport Cost and Freight Insurance

Supplier Purchaser Supplier Purchaser

Transport Cost Insurance and Freight Insurance

Supplier Purchaser Supplier Purchaser

Transport Delivered Insurance

Supplier

Purchaser
Supplier Purchaser

MGT634 Purchasing and Supply Management

EDI and E-Sourcing

Groups and cases


Metal craft (12 Oct) E Sourcing strategy (13 Oct) Bose (19 Oct) Multisite case (20 Oct)
MGT634 Purchasing and Supply Management

Types of e-Procurement
1. Web-based ERP (Electronic Resource Planning): Creating and approving purchasing requisitions, placing purchase orders and receiving goods and services by using a software system based on Internet technology. 2. e-MRO (Maintenance, Repair and Operating): The same as webbased ERP except that the goods and services ordered are nonproduct related MRO supplies. 3. e-sourcing: Identifying new suppliers for a specific category of purchasing requirements using Internet technology. 4. e-tendering: Sending requests for information and prices to suppliers and receiving the responses of suppliers using Internet technology. 5. e-reverse auctioning: Using Internet technology to buy goods and services from a number of known or unknown suppliers. 6. e-informing: Gathering and distributing purchasing information both from and to internal and external parties using Internet technology. MGT634 Purchasing and Supply
Management

Reverse Auctions
When possible ?

Requirements ?

Steps ?

MGT634 Purchasing and Supply Management

Reverse Auctions
Problems ?

MGT634 Purchasing and Supply Management

Electronic Data Interchange


The EDI (Electronic Data Interchange) enables customers and suppliers to electronically exchange transaction information such as PO, invoices, and

MRP.
Simplifications: This eliminates time consuming paperwork and facilitate easy communication between buyer and supplier
MGT634 Purchasing and Supply Management

Electronic Data Interchange


External Supplier
RPM Supplier
E-mail to the supplier Uploading the information on the portal

Subcon / TPM
E-mail to the supplier Uploading the information on the portal Linkage through ERP system

Internal Supplier
Intercompany
E-mail to the supplier Linkage through ERP system

MGT634 Purchasing and Supply Management

Electronic Data Interchange


Purchaser: Requirement generation Purchaser: Scheduled line is generated against blanket order / Scheduling agreement and sent to the supplier and accounts electronically Supplier: receives and acknowledges the order. Supplier: sends the shipping notification while dispatching the material. Purchaser: records the shipping notification in expected receipt file. Purchaser: on receipt of the material the entry is made against expected receipt and the scheduling line and an intimation is sent to accounts payable. Purchaser: accounts payable dept electronically transfer the payment to the suppliers account. Purchaser: sends remittance advice to the supplier.
MGT634 Purchasing and Supply Management

Electronic Procurement
Disadvantages Security of electronic messages Lack of face-to-face contact Other technological concerns
Standard protocols System reliability

MGT634 Purchasing and Supply Management

Purchasing

Purchasers Duties
Know the market for their commodities; ascertaining price Understand the laws (tax, contract, patent) Process purchase requisitions and quotation requests Make supplier selections Negotiate prices and conditions of sale Place, follow-up, expedite purchase orders Supplier relations Maintain ethical behavior

Do you see any problem


MGT634 Purchasing and Supply Management

Strategic Sourcing and Planner Buyer


Strategic Sourcing

Know the market for their commodities; ascertaining price Understand the laws (tax, contract, patent) Make supplier selections Supplier relations Negotiate prices and conditions of sale Maintain ethical behavior
Determine material requirements Generate purchase requisitions, PO and schedules. Issue and controlling Shop orders for factory Place, follow-up, expedite purchase orders Maintain ethical behavior
MGT634 Purchasing and Supply Management

Planner Buyer

6. Order Processing

Purchase Order
Significance Parts of PO

MGT634 Purchasing and Supply Management

Purchase Order.
The PO is a legal offer to purchase. Once accepted by supplier it becomes a legal contract for delivery of goods according to the terms and conditions specified in the purchase agreement.

MGT634 Purchasing and Supply Management

Major Parts of a P.O.


Fixed prices and quantities (including taxes) Buyers right of inspection and rejection Right to make specification/design changes Holding buyer harmless, patent infringement Suppliers right to assign contract to a third party Instructions regarding risk of loss Statement of credit and payment terms Identification Packing and preparation Statements of warranty
MGT634 Purchasing and Supply Management

Major Parts of a P.O.


Shipment quantities, dates and place Assignment of sellers rights Arbitration clause Right to cancel unshipped portion And other relevant information etc.

MGT634 Purchasing and Supply Management

7. Order Monitoring and Expediting

Order Monitoring and Expediting


Significance

MGT634 Purchasing and Supply Management

Follow-up (Including expedite and de-expediting)


Supplier is responsible for delivery. Purchase department is responsible for ensuring the delivery. Follow-up is required for
Changes in the plans IRA issues QA issues in previous delivery Product structure change etc.
MGT634 Purchasing and Supply Management

8 Incoming Inspection and Quality Control

Incoming Inspection and Quality Control


Significance

MGT634 Purchasing and Supply Management

Receiving Warehouse is responsible for receiving the goods. They should confirm
Item Quantity Place Absence of transit damage Open Purchase Order Delivery due date Provide acknowledgement.
MGT634 Purchasing and Supply Management

Receiving Mark the goods Store the goods Operate information system Communicate to QA and other concerned departments

MGT634 Purchasing and Supply Management

Self Certification

Self Certification
Significance Where to use
Staging policies Lot size and consumption Stocking policies

MGT634 Purchasing and Supply Management

Supplier Self Certification


Companies spend a large amount of money on quality inspection of incoming material This is time consuming and complicated.

Supplier self certification is therefore very useful. In this supplier certifies and assures that the quality of the material is as per the company standard. Cost implication ?
MGT634 Purchasing and Supply Management

Supplier Self Certification


STEPS
Agreeing upon common Specs. Process Parameter standardization. Vendor audits and Inputs. Trial Lots. Roll out.

MGT634 Purchasing and Supply Management

9. Invoice Processing

Invoice Processing
Significance Factors to be considered

MGT634 Purchasing and Supply Management

Payment
Accounts is responsible for payment (after QA release of the received material). Three way reconciliation
Suppliers invoice PO Received quantity

To confirm
Conditions Prices Quantities

The accounts should be very efficient and accurate


MGT634 Purchasing and Supply Management

10. Supplier Evaluation

Supplier evaluation
Why
Better decision making Better communication Feedback Motivate and direct behavior

Problems
Too much data Wrong measures Conflicting measures Drive wrong performance
MGT634 Purchasing and Supply Management

Performance Measurement - Importance



Systematizes organizational memory Pool information across plants Remove excuse for poor quality Ensure consistent policies across supplier and plants To identify the supplier performance and improvement opportunities. Helps in decision making. Negotiations Resource allocations etc.
MGT634 Purchasing and Supply Management

Performance Measurement

Characteristics of good performance measure The measurement should be usable. Without any scope for adjustment Communicate / Agreed Simple to measure

MGT634 Purchasing and Supply Management

Measures
Measures Must Be ... Strategically Significant Driving Right Behaviors Balanced Aligned Owned Linked to Compensation Actionable Easy to Collect
MGT634 Purchasing and Supply Management

Balance
Balance is Assessed and Viewed Across Three Specific Dimensions: 1. Financial v. Customer v. Process v. People 2. Leading v. Lagging 3. Efficiency v. Effectiveness

Why Does Balance In These Dimensions Matter?

1. Complete Business Perspective 2. Causality 3. Cost (Time, Resources, Investment) & Quality
MGT634 Purchasing and Supply Management

Balanced Measures
Example Measure Set
Percent Sales from New Products Net Trade Sales Total Growth NPV of NPD Pipeline (NPDC Data) Market Share (TRx) Line Item Fill Rate Percent Growth of Net Trade Sales from Existing Products Manufacturing Compliance Index Adverse Events/Product (Top 5 Products) S/G&A Productivity R&D Productivity Resource Alignment Index Percent Critical Positions Filled
F-C-P-P [1] Financial Financial Financial Customer Process Leading v. Lagging Lagging Lagging Leading Lagging Lagging Effective v. Efficient Effectiveness Effectiveness Effectiveness Effectiveness Effectiveness

Acceptable/ Satisfactory

Financial
Process Customer Process Process People People

Lagging
Lagging Lagging Leading Leading Leading Leading

Effectiveness
Effectiveness Effectiveness Efficiency Efficiency Effectiveness Effectiveness

Caution/ Additional Work Reqd.

Unacceptable; Additional Work Reqd.

[1] Financial v. Customer v. Process v. People (from The Balanced Scorecard)

MGT634 Purchasing and Supply Management

Balanced Process Measures


Suppliers
S-1 S-2 S-3

Inputs
I-1 I-2 I-3

Process

Outputs
O-1 O-2 O-3

Customers
C-1 C-2 C-3

Input Measures

Process Measures

Outcome Measures

Leading

X X

Lagging Effectiveness
Efficiency X X X
MGT634 Purchasing and Supply Management

The Operational Definition


A Precise Description that communicates how to arrive at a value for an objective. Identifies Who, What, Where, When, How Who = Measure Owner What = What to Measure (Clear, Specific, Objective) Where = Where the Measure Data Resides When = When Measured & Reported How = How to Measure (Mathematical Formula) (Longer Term)

Measure Playbook
Not all of the Measure Playbook attributes need to be defined at the same time its okay to let them mature as the MGT634 focus matures. measurePurchasing and Supply
Management

Clean Data Display, Control Limits, Mean, and Trend Line and Goal

A Well-Dressed Measure
Quick Reference Legend I.E. Trend Up = Good

4
Title

2 5

Data Legend and Chart and Data Owner Information, Update Frequency
MGT634 Purchasing and Supply Management

Description, Explanation, and Action Plan

Performance Measurement
SP = Wi X Pi
Wi Weight attached to the performance characteristic i Pi Performance of characteristic I It can be
Quality (material / documentation ) Delivery Quantity Flexibility Technical Contribution etc.

Or treat individual performance characteristic separately.


MGT634 Purchasing and Supply Management

Measures Implementation
Drive down from OGSM Develop specific measures Identify the base line data Finalize details Communicate and implement Measure and identify projects.

MGT634 Purchasing and Supply Management

Measures
Engineer to order Make to order

Assemble to order
Make to stock

MGT634 Purchasing and Supply Management

11 Non Acceptance Return to Supplier

Return to supplier
Based on the PO Local / Imported Rework / Destroy Credit note

MGT634 Purchasing and Supply Management

Others

Multi-location problem

MSPPDS: Multi-Site Procurement Production Distribution System


Selling Location 1

Port 1

Manufacturing Plant 1

Selling Location 2 Selling Location 3

Supplier
Selling Location 4

Port 2

Manufacturing Plant 2

Selling Location 5 Selling Location 6

Inbound logistic or Procurement

Production

Outbound logistic or Distribution

-Alternate sourcing for manufacturing and selling locations -Opportunities for reduction in costs and improved availability represented by solid and dotted lines.
MGT634 Purchasing and Supply Management

MSPPDS: Multi-Site Procurement Production Distribution System


Selling Location 1

Port 1

Manufacturing Plant 1

Selling Location 2 Selling Location 3

Supplier
Selling Location 4

Port 2

Manufacturing Plant 2

Selling Location 5 Selling Location 6

Inbound logistic or Procurement

Production

Outbound logistic or Distribution

-Alternate sourcing for manufacturing and selling locations -Opportunities for reduction in costs and improved availability represented by solid and dotted lines.
MGT634 Purchasing and Supply Management

EXTENT OF CONTROL
Centralized v/s Decentralized Purchase
Centralized
- Ease Of Operation, buyer specialization, Less ordering cost, control.

- Consistency - Better Pricing, more clout, better continuity - Better Maintenance Of Records

MGT634 Purchasing and Supply Management

EXTENT OF CONTROL
Decentralized - Better Time To React - Developing Local Vendors - Better Control On Local Vendors - Close Co-ordination with Plant

MGT634 Purchasing and Supply Management

Optimization
GLPK Path command Program file / Data file Set / Param / Var / Min / Max / s.t. / end.

MGT634 Purchasing and Supply Management

Simulation
Random parameters interacting with each other. Arena Vensim / Stella

MGT634 Purchasing and Supply Management

Purchasing Functionality of ERP

ERP - What is it?


ERP is a generic term used to describe a comprehensive information system designed to integrate all the business processes found in an enterprise. Efficiency and productivity are improved through the integration of information and the removal of duplicate information and processes.

MGT634 Purchasing and Supply Management

MRP OVERVIEW

MGT634 Purchasing and Supply Management

MRP RUN

MGT634 Purchasing and Supply Management

PLANNING FILE AND MRP

MGT634 Purchasing and Supply Management

PLANNING SEQUENCE

MGT634 Purchasing and Supply Management

BOM EXPLOSION

MGT634 Purchasing and Supply Management

MRP: NET REQUIREMENT CALCULATION

MGT634 Purchasing and Supply Management

LOT SIZING PROCEDURES

MGT634 Purchasing and Supply Management

MRP SCHEDULING

MGT634 Purchasing and Supply Management

STATIC LOT SIZING PROCEDURES

MGT634 Purchasing and Supply Management

PERIOD LOT SIZE PROCEDURE

MGT634 Purchasing and Supply Management

Safety stock
Fixed safety stock Range of coverage Safety days

MGT634 Purchasing and Supply Management

Purchasing master Data


Vendor master (at client level)
Information about the vendor.

Source list (at Plant level)


The master which links a material to a vendor for a period.

Purchase Info Record (at Plant level)


The master containing pricing and other information of the material if sourced from a particular vendor (This data gets adapted while converting PR to PO)
MGT634 Purchasing and Supply Management

Purchasing master data


Outline agreement
The agreement against which scheduled lines are generated.

MGT634 Purchasing and Supply Management

Process
Sourcelist Vendor Purchase Info Record / Scheduling Agreement Quality UD Payment

Purchase Requisition of a material

PO/ Scheduled Line Follow-up Receipt

MGT634 Purchasing and Supply Management

Business Planning in an ERP system

Business Planning in an ERP System


Once a year activity Based on the Business Plan for the next periods. To arrive at
Annual production plans Standard costs Machine loadings Annual Purchase volumes
MGT634 Purchasing and Supply Management

Business Planning in an ERP System


The output is used to
Arrive at the variances during the year. Bargain with supplier Decide on the focus cost improvement ideas

MGT634 Purchasing and Supply Management

Business Planning in an ERP System


1. The business plan is uploaded in System in a scenario. 2. Master data is corrected in the scenario. 3. MPS orders for the Business Plan are generated 4. Machine loading is checked to make appropriate corrections are made. 5. MRP is generated for the entire period using appropriate assumptions 6. Total consumptions is checked.
MGT634 Purchasing and Supply Management

Material Storage

Why Storage is required ?


Material Handling Material Storage IRA SLOB Pilferage Inventory

MGT634 Purchasing and Supply Management

Is it only a storage facility?


A warehouse is typically viewed as a place to store inventory. However, in many logistical system designs, the role of the warehouse is more properly viewed as a switching facility as contrasted to a storage facility. Value Addition?
MGT634 Purchasing and Supply Management

Storage
Objective
Minimize costs Maximize customer service

This is achieved by
Timely customer service Keep track of the items Minimize total physical efforts Provide requisite communication
MGT634 Purchasing and Supply Management

Storage Costs
Costs
Capital costs
Space Material handling equipments Etc.

Operating costs
Labor costs Etc.

MGT634 Purchasing and Supply Management

Warehouse Activities
Receive goods
Check the goods against order and Bill of lading Check the quantities Check for damage Inspection if necessary

Identify the goods Dispatch to storage Hold goods Pick Marshal shipment Dispatch Operate Information system
MGT634 Purchasing and Supply Management

Benefits of Warehousing
Consolidation Break bulk Processing Postponement Stockpiling

MGT634 Purchasing and Supply Management

Warehouse Location

Warehouse Location
Modeling the supply chain, J F Shapiro (pp 143)

MGT634 Purchasing and Supply Management

Warehouse Location Objective / Constraints


Modeling the supply chain, J F Shapiro (pp 143)

Objective: Minimization of transportation cost and fixed and variable costs for warehouse
Warehouse Capacity (Supply plan <= Operating Capacity) Transfer Quantity (Transferred quantity from warehouse <= operating
capacity of warehouse)

Demand Satisfaction (Transferred quantity to CFA >= Demand of CFA) Unique Channel Matrix (All product demands of a CFA to be
satisfied by one warehouse)

MGT634 Purchasing and Supply Management

Channel matrix definition Objective / Constraints


Objective: Minimization of transportation cost
Manufacturing Capacity (Production plan <= Mfg Capacity) Transfer Quantity (Transferred quantity from plant <= Production plan at
plant)

Demand Satisfaction (Transferred quantity to CFA >= Demand of CFA) Unique Channel Matrix (All product demands of a CFA to be
satisfied by one manufacturing plant)

MGT634 Purchasing and Supply Management

Warehouse Layout

Design Considerations in Warehousing


General considerations
Quantity and character of goods must be known product profiling Know the purpose to be served
Storage Distribution Cross-docking

MGT634 Purchasing and Supply Management

Warehousing Trade-offs
Fixed / variable slot locations for merchandise Build out (horizontal) / build up (vertical) Order-picking / stock-replenishing functions Two-dock / single-dock layout Labor-intensive / mechanization / automation Space devoted to aisles / space devoted to storage

MGT634 Purchasing and Supply Management

Warehousing Trade-offs
Paperless warehousing / traditional paperoriented warehousing operations Virtual warehouse / real warehouse Other space needs Retail store rooms

MGT634 Purchasing and Supply Management

Warehouse

Pallet Positions
1. Per pallet = 30 Cartons 2. For storing 13000 Cartons

(Refer Tony Arnold)

Number of pallet positions on ground required

3. Number of pallets required = 13000/30 =


433.33 = 434 Pallets 4. Three high placement 5. 434 / 3 = 144.67 = 145 pallet positions
MGT634 Purchasing and Supply Management

Accessibility
Being able to get at the goods wanted with minimum amount of work (directly) 1. Industry

2. Expiry periods
3. Fifo / Lifo etc

MGT634 Purchasing and Supply Management

Cube utilization

(Refer Tony Arnold)

Use of space horizontally and vertically Number of pallets actually stored / Maximum number of pallets can be stored

Accessibility vs. Cube utilization

MGT634 Purchasing and Supply Management

Stock Location
Functionally similar items together Fast moving / slow moving Physically similar items Working stock and reserve stock

MGT634 Purchasing and Supply Management

Stock Location
Point of usage Central storage
Fixed location
Advantages / disadvantages

Floating location
Advantages / disadvantages

MGT634 Purchasing and Supply Management

Order picking

Picking
Area
Through out the warehouse selecting items for one order

Zone
Picker works in his zone

Single order
MGT634 Purchasing and Supply Management

Multi order

Warehouse Safety

Warehouse Safety
Safety
Guarding Material safety data sheets Employees safety

Industrial hygiene
Ergonomics

Environment
Spills / incidences Disposals
MGT634 Purchasing and Supply Management

MGT634 Purchasing and Supply Management

Security of goods

Pilferage Protection
Shortage (IRA / loss) Brand name issues Etc.

MGT634 Purchasing and Supply Management

Pilferage Protection
Theft: Protection against theft of merchandise has become a major factor in warehouse operations. No private automobiles All normal precautions employed throughout the enterprise should be strictly enforced at each warehouse. Many are honest mistakes in order selection and shipment, but the purpose of security is to restrict theft from all angles. Security begins at the fence. As standard procedure, only authorized personnel should be permitted into the facility and surrounding grounds and entry to the warehouse yard should be controlled through a single gate.
MGT634 Purchasing and Supply Management

Pilferage Protection
Computerization
Computerized inventory control and order processing systems help protect merchandise from being carried out of the warehouse doors. No items should be released from the warehouse unless accompanied by a computer release document.
If samples are authorized for use by salespersons, the merchandise should be separate from other inventory.

MGT634 Purchasing and Supply Management

Scrap Disposal

Salvage and Scrap Disposal


Value of scrap may be income to the firm. Disposal must adhere to environmental regulations. Ensure no possibility of misuse The organizations interest

MGT634 Purchasing and Supply Management

Inventory Record Accuracy and Cycle count

IRA and Cycle count


Please refer to Tony, Arnold

MGT634 Purchasing and Supply Management

VMI

Stockless Purchasing
The supplier maintains the inventory for the purchaser. The cost of stocking inventory has been temporarily transferred from the purchaser to the supplier.

MGT634 Purchasing and Supply Management

NPD

NPD
Timelines based on the understanding / experience Clear expectations beforehand Involve suppliers early

MGT634 Purchasing and Supply Management

Standardization

Rather than obtaining a variety of components similar in labeling, coloring, packaging, etc. The purchasing agent should try to have those components standardized. For every component that is standardized, There is one less invoice, one less item to be inventoried, etc.

Standardization

MGT634 Purchasing and Supply Management

Value Analysis

Value analysis
Process of examining all elements of a component, assembly, end product, or service to make sure that it fulfils its intended function at the lowest cost throughout the intended life.
Objective : Increase the value of the product at the lowest cost while maintaining quality. Value = function / cost

MGT634 Purchasing and Supply Management

Value analysis
Gather information Study Speculate Analyse Recommend Summerize

MGT634 Purchasing and Supply Management

Value analysis
Separate the object in its component Check the value addition by each component Check the manufacturing process for each component Check the value addition by each process step Apply creativity

MGT634 Purchasing and Supply Management

Value analysis Team members


Executive management Suppliers Purchaser Design engineer Marketing Production Industrial / process engineer Quality control
MGT634 Purchasing and Supply Management

Team exercise
Identify Object (and its function) Separate the object in its component (Understand the assembly process) Understand the manufacturing process for each component (and go on further exploding its BOM) Identify the value addition by each process and component Brainstorm
MGT634 Purchasing and Supply Management

Thanks Best of luck


MGT634 Purchasing and Supply Management